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Pedestrians in Pudong's Lujiazui Financial District in Shanghai, China on Monday, June 20 2022. Picture: BLOOMBERG/QILAI SHEN
Pedestrians in Pudong's Lujiazui Financial District in Shanghai, China on Monday, June 20 2022. Picture: BLOOMBERG/QILAI SHEN

Asian plastic makers have been looking forward to a pick-up in Chinese consumption after the lockdown, but weak consumer demand and high inventories mean it could be a long time coming. 

Petrochemicals has been the hardest hit segment of the oil market this year. Covid-19 restrictions in manufacturing giant China hit demand in April and May, while the invasion of Ukraine upended fuel flows and raised costs for naphtha, a major feedstock.

Producers of the building blocks used to make everything from car interiors to packaging and cables have seen margins fall further this year. Profits from turning naphtha into ethylene, a petrochemical that is the base for many plastic products, dropped to $133 a tonne from more than $450 in early April.  

As China accounts for about 40% of global petrochemicals demand, according to S&P Global Commodity Insights, the fortunes of big producers such as LG Chem and Formosa Petrochemical are closely tied to what’s happening there. While lockdowns have eased, there are signs that Chinese consumer confidence will take longer to recover amid price gains and a very gradual economic rebound. 

“Durable plastics for domestic white goods and for automotive applications have yet to see a strong demand recovery,” said Larry Tan, vice-president for chemical consulting in Asia at S&P Global. Inflationary pressures in China are “causing consumers to be more cautious on spending on bigger-ticket items”, though domestic sentiment is slowly improving, he said.

Higher shipping costs and disruptions to supply chains are also complicating the global plastics trade, making it tougher for Asian producers to offset sluggish local demand by exporting to Europe.

Chinese petrochemical plants have increased operating rates over the past few weeks, but they’re still running only at 85% of capacity, compared with 100% normally, according to Kelly Cui, a consultant at Wood Mackenzie. Stockpiles are also high, she said.

There are optimistic signs for plastics producers, however. Benchmark North Asian naphtha prices have fallen about 30% since spiking in early March after the Russian invasion of Ukraine. But they are still high on a historical basis. Some of their products — such as xylene, toluene, benzene and MTBE — that can be blended with petrol are also seeing strong demand.   

And Chinese household spending should also start to improve. Goldman Sachs Group sees it increasing 4.5% in the second half from a year earlier, compared with a 1.5% contraction last quarter. 

However, Beijing’s Covid-19 Zero policy means the risk of more lockdowns hasn’t gone away, said Wood Mackenzie’s Cui. Consumption is slowly on the mend, but it could take until September, usually the peak-demand period for polyolefins — a key petrochemical segment — to see a firmer turnaround, she said.

Bloomberg News. More stories like this are available on bloomberg.com

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